The Ghana cedi has depreciated largely since the beginning of the year 2022 against the US dollar, falling by as much as 47 percent against the greenback, as of this writing. This exchange rate trajectory and other developments–slow economic growth and surge in inflation–in the macroeconomic space of the country is a reflection of the exacerbating impact of the Russia-Ukraine war on the “still recovering” economy of Ghana.
Data from CEIC shows that the foreign reserve of Ghana which stood at $8.4 billion in January 2022, declined to $5.9 billion in June, suggesting that the tightened global economic condition placed a lot of pressure on the country’s reserve, thereby constraining forex liquidity. A further drive down in the country’s currency was caused by demand pressures from offshore secondary market activities, oil importers, and weakened investors sentiments following downgrades by rating agencies, according to a World Bank report.
Moody and Fitch, major credit rating agencies, had previously downgraded Ghana’s credit rating, indicating more pressure could be ahead.
In the June 2022 Ghana Economic Update, the World Bank stated that the depreciation in the value of the Cedi drove up the domestic price levels for imported goods, resulting in imported inflation. This is because Ghana’s economy depends seriously on imported goods.
Notably, the depreciation in the value of the cedi has spurred a continued rise in Ghana’s consumer price index as imported inflation exceeds domestic price levels in the country. Ghana’s inflation rate climbed up at a faster than expected rate to 31.7 percent in July, having reached 29.8 percent in June. This clearly shows the spiraling effect of the slump in the value of the cedi.
Mr. Samuel Kobina Annim, the government statistician in Ghana, said that the 31.7 percent inflation rate is the fastest pace since November 2003 and marks the 11th consecutive month the rate has exceeded the top of the central bank’s target band of 6% to 10%.
As noted earlier, the global economic shocks caused by the war in Ukraine, and the tightening of global financial conditions resulting from many central banks’ efforts to tame rising inflation are suggesting a challenging economic outlook for the country.
What You Need to Know
- Dollar has appreciated by about 11 percent year-to-date and also reached parity with the Euro, this is particularly straining for Ghana and other developing economies.
- The Bank of Ghana (BoG) intervened in the forex market In the first quarter of 2022 by auctioning foreign exchange to the tune of US$450m. The move helped to ease the tight forex demands.
- The Bank of Ghana is still maintaining the November 2021 monetary policy rate unchanged at 19% despite rising inflation. The bank had increased its key lending rate by 550 basis points since the end of last year aiming to curb high inflation.
